News

CME: US Beef Markets Will Remain Under-Supplied for Months

US - Analysts polled ahead of the USDA monthly cattle on feed report expect March feedlot placements to once again decline compared to the previous year, write Steve Meyer and Len Steiner.

As is often the case, there is a wide range of placement forecasts but they are all lower than last year and on average the ten analysts polled estimate a 4.4 per cent decline in the number of cattle that went on feed.

If they are correct, March was the sixth consecutive month of lower feedlot placements. In the last three reported months (Dec - Feb), placements have declined by 477,000 head and March estimates imply another 79,000 head decline.

December and January placements were particularly light, dropping by 117,000 head and 227,000 head, respectively. But despite the supportive feedlot inventory numbers, fed cattle futures have dropped sharply in the last two trading sessions.

The decline follows rapid value erosion in the cash markets and growing concern among market participants that some feedlots may be behind in marketings and could push prices even lower in the short term.

Last night, USDA once again quoted lower fed cattle prices on limited trading, with a number of cash trades in the $157/cwt area.

We highlighted “short-term” because the fundamentals in the fed cattle complex still imply that the North American beef markets will remain under supplied for many months to come.

Cattle slaughter has been particularly light in the last three months and this has increased the supply of cattle that have been on feed for more than 120 days (i.e. cattle that will be market-ready in the near future).

Packers have struggled with poor margins and they have kept the lid on slaughter even as low capacity utilisation also hurts their bottom line.

Taking the data from the analyst survey as a given (while we wait for the USDA report to validate them), we estimate that as of April 1, there were 4.1 million cattle that had been on feed for more than 120 days, 424,000 head (+11.6 per cent) more than the same period last year.

This number alone would suggest increased selling pressure for feedlots in the next couple of months. However, feedlots have shown that due to a limited number of replacement cattle and high breakeven values for the cattle they placed on feed last fall, they are willing to keep cattle on feed a bit longer, sometimes in lower energy rations, so as to stretch out the marketing window.

Two months ago, the supply of 120 day cattle on feed was 16 per cent higher than the prior year and yet fed prices in March and April were quite robust. Despite the near term imbalances, the trend in the cattle market remains one of short supplies relative to demand, both domestically and exports.

One item that still bears watching is the structure of placements. During the Dec—Feb period, placements were down 477,000 head. Placements of cattle under 700 pounds were down 355,000 head.

Improved grass conditions have meant that producers find value in lettng cattle get bigger on grass and wheat pastures rather than placing them at lighter weights in feedlots. The net effect of this is that it tends to widen the marketing window and slows down the flow of cattle.

The impetus to rebuild the herd remains strong and this will continue to limit the number of heifers going into feedlots this year. Heifer slaughter in the last three reported months (Dec-Feb) was down 7.7 per cent compared to a year ago while steer slaughter was down 4.6 per cent.

Earlier this week we saw numerous reports of improved moisture conditions in the Southern Plains. Drought maps and pasture conditions will be a regular feature in this report in the coming months. Weather is a critical driver behind herd rebuilding and feeder cattle availability.

At this point, the numbers all continue to imply ongoing cattle shortages as cow-calf operators look to expand in the next few years. Cattle marketings in March are expected to decline 1.9 per cent compared to a year ago, in line with the steer/heifer slaughter for the month which was down 2.4 per cent.